Continued from Part 1, where you should have figured out what type of loan you want to get, gathered copies of your important paperwork, and gathered a list of potential lenders. Now to narrow things down to one final lender.

III. Narrowing Down The List
To trim down your list, you may want to call some of them up and ask them a few questions.

1) What type of loans do they specialize in? (Don’t tell them what you’re looking for yet.)
2) What do you need for a rate quote and Good Faith Estimate? What is your quote? Many will give you a rate quite easily, but the GFE is sometimes harder without submitting private information. Just remember, any such quote is only as good as the information you provide.
3) How fast can they lock their quoted rate/points if you choose them? Can I lock this quote you just gave me today? Will they provide written lock confirmation? Will they guarantee their lender fees? (See below.)

Some other people throw in some quiz questions that relate to guessing future mortgage rates, but I don’t really care about that. Your final list might look something like this:

1. A few Upfront Mortgage Lenders. These lenders have agreed to disclose accurate rates/points for the market niche they service, as well as guarantee their lender fees. At the very least, you should be able to get a good idea of a competitive current rate.
2. First-time homeowner programs in your area, or perhaps you have a preferred lender for your housing project.
3. Credit unions that are either local or otherwise restrictive (only teachers in your county, military affiliation, etc.)
4. A broker that was highly recommended by a trusted friend experienced in real estate.
5. A loan officer from a “big” bank, perhaps where you have an existing relationship.

IV. Compare Good Faith Estimates
When you apply for a mortgage, the government requires your lender to give you a Good Faith Estimate (GFE) within three days of your application. But you should be able to get one, or something similar to one, beforehand with no cost. When done, you should have GFEs from about 2-5 people to compare side-by-side. The actual document looks like a huge list of different fees and can be pretty confusing, but you need to simply break it down into three parts:

a. Interest Rate / Discount Points
– Use interest rate, not APR
– Also note lock period

b. Fees Paid To Lender (Add these all up)
– Application Fee
– Commitment Fee
– Rate Lock Fee
– Origination Fee
– Funding Fee
– Administrative Fee
– Transfer Fee
– Processing Fee
– Loan Set-up Fee
– Wiring Fee
– Discount Fee
– Flood Certification Fee
– Tax Service Fee
– Underwriting Fee
[Read more…]

Shopping for my recent mortgage loan was a pain. It shouldn’t be this hard! I had hope for Zillow, but a recent quote request for my same loan only got two offers from lenders, both of which weren’t very good. Ah well. Until it gets better, here’s how I would go about things if I could go back and do it again.

The Primary Goal
The most common pitfall with mortgages is the classic bait-and-switch. They lure you in with a rock-bottom rate and low closing costs… until signing day when your final HUD-1 statement looks completely different. Fees get changed, and by then is really hard to back out. Good Faith Estimates are not legally binding, and there is no real penalty for lying on them. In addition, interest rates change every day. If they don’t list their rates publicly, how do you know if the next day you’re still getting their “best” rate? “Oops, rates went up!”

I think the best thing to do is to be prepared, so that when you are ready you can go out and obtain some firm rate quotes, and lock it in. I would not sleep well until I had a loan commitment from the lender, an agreement on closing costs, and a signed rate-lock letter.

I. Prep Work

• Learn about mortgages. Many people rely on their mortgage broker to tell them what kind of mortgage to get. This is nice, if you have a honest, unbiased broker. This is also how people got talked into 0% down subprime adjustable rate mortgages. I hate the idea of signing up for something you don’t understand. Some reading suggestions: Fixed or adjustable? Loan term? Paying Points?
• Fill out a Uniform Residential Loan Application. You’re gonna have to provide this information anyway, so why not do it ahead of time. Download it here.
• Save and/or make copies of all your supporting documentation. For a full-documentation loan, you will need at a minimum your last two months of paystubs, bank statements, and investment statements. (More assets is better, but for simplicity I only provided my primary accounts and left out the ones with tiny balances.) You’ll also your last two years of tax returns. If you’re self-employed, they’ll want two years of those returns as well, including your accounting books for this year. Collect whatever else might be important, including any divorce or bankruptcy paperwork.
• Get a copy of your credit report from all three bureaus. Getting reports should be free. A score is also helpful, but not necessary since they will pull their own scores anyways. See here for ways to get a free credit score. Check for inaccuracies, and get them fixed as soon as possible. File dispute forms online at each bureau, and follow up.

II. Find Potential Lenders
This part should be pretty easy. Suggestions:

• National credit unions – Navy Federal, Pentagon Federal (1st and 3rd largest in the US)
• Local credit unions and banks
• Huge national banks
• Upfront mortgage brokers
• References from Realtor, family, friends
• Websites, both from aggregators and direct lenders

If you’re in the military or have direct family in the military, check out Navy Federal Credit Union for some great rates. I’m trying to sign up my family member right now in preparation for our next mortgage.

Some of this is personal preference, but I think most brokers and websites have access to the same general rates for common conforming loans, because they rely on what the secondary wholesale market is providing. Credit unions and local banks sometimes lend their own money, which means their rates might be better (or worse).

Next time: Comparing Offers, Negotiating, etc.

The post is a new addition to my Experiences in Buying A Home.

If you’re shopping for a new mortgage, there is now another option out there. The Zillow Mortgage Marketplace attempts to make connecting borrowers and lenders as effortless as typing a search on Google. Will it work?

Application: Less Nosy, But More Responsibility
While shopping for loans, I had two big worries. One, I didn’t want to give out my Social Security number to everyone. Two, I didn’t want 100 desperate brokers calling me all day long “fighting” for my business. No problem with Zillow, you only need to fill out a application with your property details, your credit score, your income, and your assets. This is all the information that a loan officer needs to provide you a quote.

To see your loan offers, all you need to do is sign up with an e-mail address. No SSN, no name, no address, no telephone.

But you really want to avoid painting a rosier picture than reality, which is what most people tend to do. If your info is wrong, then the lender’s quote is null and void, and everyone’s time was wasted. Check your credit score beforehand, ideally at all three credit bureaus. It’s one thing to say you make $X per year, it is another thing to prove it. For a full-documentation loan, you need to have two years of W-2 forms, your last tax return, and your most recent bank statements. They will want everything! I’d even say it’s a good idea to pull these up before filling out this form.

Comparing Bids and Feedback Ratings
Participating lenders are supposedly verified to make sure they are licensed brokers without excessive complaints filed against them. Bids are also required to be specifically tailored to your loan, not just generic rate instantly created by a computer. In addition, Zillow is adding a feedback system (like eBay) where you can help determine the reputation of lenders (service, extra fees, if they bait-and-switch, etc.). The system is probably too new for this to matter right now, but hopefully it’ll help in the future.

I submitted an application today for a home equity loan, but I haven’t gotten any bids yet. However, I do like that all the loan quotes will be organized in the same format, so you can compare loan offers side-by-side easily. Sometimes it’s a puzzle to figure out all the lender’s fees in Good Faith Estimates.

Finally, lenders will be able to see what other lenders have been offering you. This gives them a chance to see their competition, and even lower their initial bids. I don’t see anything wrong with that. 🙂 Once you pick out a lender to contact, then they will see your e-mail and you can move forward with the loan.

I couldn’t find any information about how Zillow is making their profit from this. I’m assuming they will charge a fee per lead or per closed mortgage.

More info: Zillow Press Release

When you look at price quotes on mortgages, you should always note both the rate and the points. A discount point is one percent of your loan. So paying 1 point on a $200,000 mortgage costs $2,000. Usually this is paid upfront as part of your closing costs, but some people also finance their points (roll it into an existing or new loan). The more discount points you pay, the lower the interest rate on your mortgage.

For example, here are some quotes that I pulled up today for a $400,000, 30-year fixed-rate loan:

So you have to ask whether you would you rather pay

1. a higher amount upfront + lower monthly payments?
2. or a lower amount upfront + higher monthly payments?

The general logic is pretty simple. Let’s say your local gas station asked you to pick between these two scenarios for buying gas:

1. $100 upfront + $2 per gallon.
2. Nothing upfront + $3 per gallon.

You could probably do the math pretty quickly to see how many gallons you’d have to buy to break even. After that point, you’d be happily buying cheap gas and saving more money each subsequent fill-up. But if you don’t use much gas or might move away from the gas station soon, you may never reach that point and never make back your upfront outlay.

In reality, there are additional complications like “what would my unused money be earning?” and “what about tax-deductions?”, so the easiest way to do this calculation with mortgage rates/points combos is to use an online calculator like this one at the Mortgage Professor.

Let’s use it to compare Loan #1 and Loan #4 above. I put in the following info:

…and receive these results:

Taking Points or Not: Will You Keep Your Mortgage 4-6 Years?
So if you keep the loan less than 4.83 years, you won’t quite make up your upfront points paid. But after 4.83 years, each monthly payment you make will mean you saved more money over the higher rate loan. ($10,000 after 10 total years in this case.)

So the question is – how long will you stay in your home? The weird thing is, almost all loan rate/point combos that I’ve seen give you a break-even period of about 4-6 years. Even if you take as little as 0.50 points. So that’s the magic number. More or less than about 5 years?

I’ve read stats that say the average mortgage lasts about 7 years. But you should know yourself better than some average. Is this a starter home? How stable is your job? Are you rooted to the area due to family or other reasons? If you think you’ll stay less than 5 years, don’t pay points.

How Many Points? Well, How Confident Is Your Guess?
Now let’s compare Loan #1 and Loan #2, only have a difference of about half a point. The breakeven period is now 4 years, with only a $2,187 advantage over 10-years. So here both the risk and potential reward is less. If you’re wrong and you move earlier than 4 years, you might be out a thousand dollars or so. But even after 10 years, your advantage would only be about $2,000.

So, the more points you pay, the bigger the bet you make that you’ll stay past the break-even period. You could pay 4+ points or more if you really wanted to.

Update: As commenter Ted has pointed out, paying points also reduces your ability to refinance to a lower rate mortgage before that break-even period. So room for rate drops should also be put into consideration.

As for us, we definitely felt that we were going to stay longer than 5 years, but didn’t want to “bet” that many points. So we ended up paying 1 discount point to lower the rate on our loan to 5.625% at the time. I really don’t expect for rates to drop far enough lower so that a refinance would be worth it, but I could be wrong.

Finally, you should always compare different rate quote combos from different lenders. One lender might not have the best zero-point loan, but might have a relatively awesome 2-point loan. Don’t be afraid to ask for additional rate/point combinations if you don’t get them at first.

The post is a new addition to my Experiences in Buying A Home.

If there’s one thing missing from shopping for a mortgage loan, it’s transparency. You would think getting a mortgage would be close to shopping for a gallon of gas, but it’s more like shopping for a car. Blech. By this I mean you and the salesperson (broker) are at odds – you want the lowest price, and they want the highest price (and therefore fattest commission). But just like shopping for a car, information is the best weapon. What is the invoice price? What factory discounts or incentives are out there? What are other dealers asking?

The good news is that there are a few brokers and lenders out there who are working with more transparency. Most of these are listed on the Mortgage Professor’s website, which is a good source of information overall.

Upfront Mortgage Brokers
Basically, the appropriate analogy here is that your car salesman has agreed to a fixed commission (say, $500) no matter what car they end up selling you. You know both their fee, and they will share what wholesale rates are available. Therefore, the only incentive left is to get you a loan type that fits so you can recommend them to your friends. You can find a list of Upfront Mortgage Brokers (UMBs) here.

One problem here is that there may be a lack of local UMBs in your area. Second, I have found that some brokers are more “upfront” than others. I feel that they should simply list their fees openly and directly (i.e. 1.5% of loans below $500,000), instead of having to submit an application first and jump through hoops.

Upfront Mortgage Lenders
Many rate comparison sites include a bunch of teaser rates that nobody can actually get. Either their credit is mysteriously not good enough, or that rate “just expired – sorry!”. What we want are real-time rate quotes, and guaranteed lender fees! The car analogy here is that you want the price quoted to be “set in stone”. No waffling at the very end and tacking on fees like “rust-proofing” or “documentation fees”.

This is exactly what Upfront Mortgage Lenders (UMLs) are meant to provide. All UMLs must:

1. Provide quick access to the loan types it prices online.
2. Disclose all lender fees, including points, origination fees, and any fixed-dollar fees, and guarantee them to closing.
3. Disclose all third party fees with the best estimates possible, indicating which if any are guaranteed by the UML.
4. Provides a clear explanation of its rate lock requirements, and disclose them prominently.
5. Disclose all the information about its ARMs needed by shoppers to “make intelligent decisions”.

For example, lender Amerisave aggregates the available offers by other lending institutions, but it also has agreed to disclose its wholesale prices and markups to customers. For example, a recent quote on a $480,000 loan (home value $600,000) gave me a Guaranteed Lender fee of $5,780.00 (1.204%). This value includes all these various fees:

• Application Fee
• Funding Fee
• Administrative Fee
• Transfer Fee
• Origination Fee
• Processing Fee
• Loan Set-up Fee
• Wiring Fee
• Discount Fee
• Flood Certification Fee
• Tax Service Fee
• Underwriting Fee

This assures you that new fees won’t be added or others increased at the last moment, when you’re already stuck. However, it does not include all closing costs paid to third parties like the appraisal, credit report, and title insurance. Here is the current list of certified Upfront Mortgage Lenders, sorted with my favorite at the top:

1. AimLoan
2. E-Loan
3. Amerisave
4. National Mortgage Alliance
5. BetterChoiceLoans

One potential problem with these is that if the loan you want isn’t very common (like a 30-year fixed, 5/1 ARM), then it may not be available for an instant online quote. Each lender can pick which loans it wishes to openly provide guaranteed quotes for. But overall, these sites are great for seeing what is a competitive price daily.

My Experience
When I started looking for a loan, essentially I didn’t really care what the salesperson made, I just cared about the final price of my car. That kind of made sense in my mind, so I got quotes from everybody under the sun. Of course, there are several bait and switch tactics that unethical brokers can utilize, so trust and my impressions of each broker did matter. I felt (possibly incorrectly!) that I was educated and knew what to look out for. If they weren’t willing to give me an instant quote based on my criteria then I said thank you and went to the next person on my list.

In the end, I did not actually go through an UMB or UML, but I did use the websites as comparison shopping tools. It turned out that the best price package that I found was also offered also by someone that was a personal referral at a small local bank. (More on that later.) However, I am very happy that these options exist. If anyone has used a UMB or UML, I invite you to share your experiences in the comments!

Now that I have a mortgage of my own, I finally spent the time to read up on Money Merge Accounts – also known as Mortgage Offset Accounts, Mortgage Acceleration Programs, Equity Accelerators, etc. You may see them sold by various companies like United First Financial or Tardus. All of them offer to make it easy to pay off your 30-year mortgage earlier by 10 or 20 years without changing your spending habits. My goal here is to be educational without being inflammatory and using words like “scam”.

I think the best way to do this is for people to view their own 15-minute sales presentation video, and have me explain afterwards how the numbers really shake out. If you’re short on time, you can drag the little arrow to the middle and pay attention to their walkthrough of the $200,000 accelerated mortgage paydown.

Breaking It Down: Simplified Version

Finished? Okay, here is a simplified version of the situation in the video. Let’s just say you have plain loan with a $200,000 balance being charged 6% simple interest (accrued daily). You can pay the balance down, or borrow more money as you wish. You don’t have any minimum payments for the time being. You earn $5,000 each month, and have $4,000 in expenses. There are two sources of potential savings through this account.

Source #1: Interest Offset
If you simply deposited your entire paycheck into the loan balance, it would reduce the loan balance temporarily to $195,000. As you pay your $4,000 in bills throughout the month, you balance will go back up to $199,000. But your lower balance throughout this time will reduce the amount of interest you’re being charged. This is what they call “interest cancellation” or “interest offset”.

This interest savings will repeat each month. In an ideal situation, it would be like having your loan balance decreased constantly by $4,000. At 6% annual interest, this would be $240 a year, or $20 a month. Actual net savings would most likely be far less if you usually keep your idle cash in an interest-bearing account, but let’s just leave this number to be generous. Again, we are ignoring additional fricton

Source #2: Additional Principal Paydown
But hey, notice that after the first month your loan balance is now only $199,000. This is because you have $1,000 in extra income each month. Let’s assume you wish to keep paying down this loan with it. Besides lowering the amount owed, it also saves you interest this year and all the years after that. That’s $1,000 each month + 6% interest. In one year, you will have paid down the loan by $12,000 and also avoided $387 in interest. That’s a “savings” of $12,387 a year.

My point? Most of the benefit of this program is due to the fact that you are using all of your excess money to pay down your loan, not the interest offsets. This is also confirmed using their own numbers:

Breaking It Down: Using The Provided Example

In the marketing video, by using their special optimizing algorithms and juggling money between their Home Equity Line of Credit and the $200,000 mortgage, they claim to have shortened a 30-year fixed mortgage so that it can be completely paid off in 10.1 years.

However, this result can be matched almost exactly by simply using this Mortgage Payoff calculator. Using the inputs of a new 30-year mortgage of $200,000 at a rate of 6%. Now let’s put that $1,000 as an additional monthly payment on top of the required $1,199. Again, you’ll see that your mortgage is shortened by 19 years and 10.5 months – the same as having it paid off in… 10.1 years! Virtually all of the mortgage acceleration is explained by paying extra towards your mortgage.

One of the first things you learn about in investing is the power of having your money earn compound interest. Well, holding a mortgage is like paying compound interest to the banks. A $200,000 mortgage for 30 years at 6% ends up being $431,677 in total payments. On the flip side, paying a seemingly small additional amount of money per month towards your mortgage can shorten your loan drastically. Bookmark the calculator above and simply type in your own remaining mortgage balance. You’ll see that even an extra $50 per month would shave off 3 years from the example 30-year mortgage!

Conclusions So Far
Before even considering these programs, you have to ask yourself if you really do want to pay off your home early. That is a separate argument, and there are several arguments against it.

If you do decide to do this, I hope that I’ve illustrated (as many others have also discovered) that if you strip away all of the marketing distractions, the actual monetary benefit of this program is probably around 1% interest offset and 99% old-fashioned mortgage principal pre-payment. Simply keeping your idle cash in a high-yield bank account, and putting the cash you have left over towards your mortgage principal each month, will yield virtually the same results. All of the optimizing software in the world won’t change this fact by any significant amount.

What this software will also provide is give directions for payment each month, as well as continually update your projected payoff date. Is this worth $3,500? Definitely not for me, but I’ll try to show next why it’s also not worth it for most people. Meanwhile, consider this: Putting $3,500 towards the $200k mortgage – instead of buying this software – would shave over a 1.3 years off the loan length and save over $16,000 in potential interest all by itself.

Additional Resources

• UFF Plan: Another Good Fairy of Rapid Payoff – Mortgage Professor
• Money Merge Account FAQ – FatWallet Forums
• Money Merge Accounts: Good Fairy or Demon? – ActiveRain
• Clark Howard Radio Show on Money Merge Accounts
• Don’t Be Tricked By Financial VooDoo – Integra Mortgages
• Money Merge Accounts: the Good, the Bad, and the Ugly
• Money Merge Accounts: Good Deal For Home Borrowers? – Simple Dollar
• Is a Money Merge Account a Good Way to Pay Off Your Mortgage? – Get Rich Slowly